International donors whose funds sustained the Palestinian Authority for much of its life, and who are now alarmed at the win of the Islamic Resistance Movement (Hamas) in the Palestinian parliamentary elections, could cut off their aid, effectively threatening to bankrupt the future Hamas-led authority.
The European Union and the United States have reacted nervously to the Hamas win, with some officials calling for a total cut-off of foreign aid to Palestinian institutions.
A member of the European Parliament said Thursday that the EU does not see how it can fund an organization that has not renounced armed struggle against Israel, the main ally of Western nations in the Middle East.
Hamas says it will continue to fight Israel as long as it occupies Arab land. However, following their win, Hamas officials offered Israel a one-year extension of a current truce with the Jewish state.
But the United States, which classifies Hamas as a terrorist organization, has expressed deep unhappiness with the results, and some U.S. officials said Washington will sever all aid.
The World Bank estimates that 1.1 billion dollars of the PA’s budget in 2005 about half of the total came from foreign donors.
On Friday, U.S. Consul-General in Israel Jacob Walles said the United States would freeze aid to the Hamas-led government. He said that last year, the PA received 400 million dollars in direct aid and several million more through U.N. charities.
U.S. Senator John Thune introduced a non-binding resolution calling for an end to U.S. assistance to the PA if a ruling majority party within the Palestinian Legislative Council maintains taking up arms as a means to liberate Palestinian land.
"It would be wrong for a single American tax dollar to go to the Palestinian Authority while a majority party within their parliament calls for the destruction of Israel," said Thune. "Israel is one of America’s closest allies and peace in the Middle East is one of our top priorities."
U.S. Senator Lindsey Graham, a hawkish Republican, called for reconsidering U.S. assistance to the Palestinians, who he views as hostile to Israel.
"The election results amount to a de-facto declaration of war by the Palestinian people against the state of Israel," he said. "It’s imperative our nation redouble its commitment to the state of Israel and cautiously evaluate any future assistance to a Palestinian regime governed by terrorists."
Israel, which also gives the PA funds through VAT, social security payments, customs duties and tax transfers, said it may also turn off the money going to the Hamas-led government.
"We will face practical problems of how you deal with people that call for the destruction of Israel," Yossi Bachar, director of Israel’s Finance Ministry, told the Israeli newspaper Ha’aretz Friday.
"If they want to continue to work with us, they will have to find a solution, otherwise I can’t see how they would get the money."
James Wolfensohn, the international community’s special envoy to the region and former World Bank president, warned that cutting aid could throw the Palestinian economy into chaos.
"The Palestinians are basically bankrupt," he said, adding that the PA has no funds to pay salaries of Palestinian government employees. "If you do not have the money to pay 135,000 Palestinians, you are going to have chaos."
But some analysts say that the Hamas win so complicated the situation for all parties involved that the EU and U.S. may actually be bluffing. The George W. Bush administration cut ties with the PA, but had to rebuild them again to win back lost influence.
Aid has been one of the main channels for influence on pro-Western governments led by the secular but nationalist Fatah faction, widely considered to be corrupt and ineffective, including by international financial institutions.
"I cannot imagine they will find some way to offer some assistance just because it allows to have some kind of leverage and to shape the negotiations to some degree, and I think the Europeans are much more so that they would be even less willing to totally cut off aid because they want to be a negotiator," said Edward Sayre, assistant professor of economics at Agnes Scott College and an expert on the Palestinian economy.
Another reason that Hamas may survive a threatened economic boycott is that the organization, known for its transparency in administrative and financial matters, may perform better than the previous government.
In December, the World Bank, which controls a 250-million-dollar fund created in 2004 that disburses foreign aid, has frozen its disbursements in December citing failure of the PA to meet its benchmarks on accountability and transparency.
One Hamas leader reportedly said Friday that his group now contemplates an "overhaul" of the Palestinian economy, but failed to give details. Mahmoud al-Zahar said he will move the authority towards more openness and credibility.
If it succeeds, which some analysts say it will, Hamas could win economic credibility, inviting more investments and eventually more foreign aid.
Sayre said the main threat to an economic recovery under Hamas is if Israel decides to seal off Palestinian areas and stop the movement of goods and workers, who cross into Israeli areas for work. If Hamas can avoid that, it may pull off another economic success.
"If the EU and U.S. definitely do cut off aid, then there’ll be a negative effect, and if Israel doesn’t want to deal with them at all in terms of borders and movement of goods, then that will stagnate the economy," said Sayre.
"But as long they are able to get some funding from the U.S. and the EU, which I think is likely, and as along as they are able to negotiate to some degree with the Israelis and open up these borders, then I think it’s possible."